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Monthly Archives: December 2012

Once upon a time, Mohammed Morsi’s election as President of Egypt invoked nationwide pride, celebration and relief that finally stability might be on its way. Many may not have voted for him, but at least they could rest easy that the military generals were out of power and the democratic process was underway.

“I have no rights, only responsibilities,” Morsi said to cheering crowds chanting, “God is great”.

“If I do not deliver, do not obey me.”

Half a year later and his words have come back to haunt him. The economy has deteriorated so much that even the Central Bank has warned of a critically low level of foreign reserves. People are panicking and rushing to trade their pounds for dollars.

To the detriment of the population, today’s Egypt is not dissimilar to the country ruled under former president Hosni Mubarak. The Morsi administration, like Mubarak’s regime, is struggling to win legitimacy from the people and contradictions on the path ahead have confused the international community.

Mubarak began his presidency in much the same way as Morsi. He won the support of the nation by releasing prominent political prisoners and removing some restrictions on the media.

He also took the step of inviting the country’s most prominent economists to a conference to discuss the deteriorating condition of the Egyptian economy and displayed genuine will for economic reform. (Morsi is soon planning a “National Dialogue” on the economy).

Sadat had left behind a heavy burden of high levels of foreign debt and high inflation. Egypt’s economic structure was askew.

And in Mubarak, who appeared less domineering and egotistical than his predecessor, there was hope in the hearts of Egyptians that change was coming. But it was clear within a year of his inauguration that it was not meant to be. The emergency law was renewed and reforms slowed to a glacial pace.

“Sure enough”, wrote Galal Amin in the introduction of Egypt in the Era of Hosni Mubarak, 1981-2011 “the sky began to darken and little by little we began to despair of any real political or economic change occurring”.

The honeymoon was over and Egypt seemed forever destined to be a “Soft state”, or:

“A state that passes laws but does not enforce them. When the state is weak, taxes are not collected, people are left to break the law, they lose respect for the police, traffic laws are flouted, and security is lax,” wrote Amin.

Arabist John Waterbury saw the soft state as increasingly ingrained into the fabric of Egypt. In The “Soft State” and the Open Door, he wrote:

“Egypt, whether under Nasser or Sadat, has been a soft state. Neither leader felt it was necessary or desirable to sweat significant segments of the citizenry for the sustained savings that might have made relatively autonomous growth possible.”

This sad situation has repeated itself with Mubarak, and now it seems with Morsi.

Egypt’s only hope now is for the president to begin to reform the creaking bureaucracy and ease an unsustainable subsidy regime, while attracting investment and creating new jobs to lessen the blow. It won’t be easy, but it is the burden of a president to do what must be done even if it hurts the reputation of his political party.

That should be the theme of 2013. But the lack of a clear economic vision is worrying, as Nadine Marroushi, a Cairo-based reporter for Bloomberg, and I will explore through themes that cover the long-winded negotiations with the International Monetary Fund, the costly addiction to energy subsidies and the rise of the labour movement.

Happy New Year.
Farah
Editor, Rebel Economy

ECONOMIC GROWTH FORECASTS

Egypt’s government has said it will focus on boosting flagging economic growth to 3.5% this financial year and 4.5% in 2013/2014.

That is a scaled down version of a previous forecast for growth of between 4% to 4.5% for 2012/2013.

The economy, riven with political and economic strife, has struggled to grow as the uprising that toppled Hosni Mubarak in February 2011 chased away tourists and investors.

Still, the economy grew by an annual 2.6% in the third quarter of 2012, President Mohamed Morsi said in a televised speech this week.

In the year that ended June 30, gross domestic product grew by a lacklustre 2.2%, up from 1.8% in the 2010/11 financial year, according to statistics published by the Finance Ministry.

This compares with annual growth rates of 5% and higher before the regime of Hosni Mubarak was overthrown in 2011.

Rebel Economy surveyed seven economists and two financial analysts that on average said the economy would be hard pressed to grow above 2% in the next financial year.

Most have pencilled in growth of between 2% and 2.5% in the next financial year. There are anomalies however in forecasts, with one chief economist at a Cairo-based investment firm saying the nation could experience “significant” growth of 6% or 7% next year if the IMF loan is signed. The agreement would unlock at least $14 billion of financing in other loan packages and would provide the stimulus needed for growth, he said.

All those interviewed agreed that the IMF loan is the cheapest and most effective catalyst for an economic revival. The relatively easy 1.1% interest attached is far more favourable than expensive government bonds and bills the state has sold to try to narrow the deficit. These have been sold at yields as high as 16%. Now, the interest payments on Egyptian government bond yields are increasing at a faster rate than spending on subsidies and wages. Economists say these payments now make up around 15% of government spending.

The heavy burden on banks to buy these securities has also diverted cash that would have been spent in the private sector on narrowing the budget deficit.

Due to the significance of the IMF loan for an economic recovery, Rebel Economy has laid out three potential scenarios based on the negotiations giving some indication of what could happen in the months to come and the impact on elements of the economy including the currency.

THREE SCENARIOS BASED ON IMF LOAN NEGOTIATIONS

SCENARIO 1: IMF loan is passed in early 2013 (Jan or Feb)

The most favourable of all scenarios would see the IMF agreement officially signed in January. Under this scenario, the one month delay would have little impact on Egypt’s economic framework presented to the IMF which includes a package of measures to cut wasteful spending and earn revenue. In a reassuring sign, Egypt’s prime minister Hisham Qandil latest statements indicate that negotiations will resume in January. Qandil told reporters there won’t be any fundamental changes in their economic plan with the IMF.

This would mean that Egypt would immediately have to go ahead with a package of reforms it has proposed to appease the IMF, including tax hikes and subsidy reforms before or as soon as the loan agreement was signed.

These unpopular economic reforms will be difficult to implement two months before the parliamentary elections when the Muslim Brotherhood hopes for significant support. Reforms will be particularly hard to implement because of the president’s slim mandate. Morsi’s decision to rush ahead with a vote on the constitution despite calls from the opposition to delay it left him with a polarised country.

However, if the government implements these reforms in the right way – by communicating the “Hows” and “Whys” – the loan will go some way to relieving pressure on the currency and foreign reserves. The steady depreciation of the pound will be stemmed and the rush to swap pounds to dollars will also ease off as the public sees a light at the end of the tunnel.

Economists at Beltone have forecast an additional drop in reserves to about $14 billion in December, or the equivalent of 2.8 months of imports, well below the “safe” level.

Therefore, an injection of almost $5 billion would instantly provide a buffer to the Central Bank and the budget. More importantly, the IMF loan will act as a catalyst for the release of other loans that are contingent on this agreement being signed. Economists say that this additional support amounts to about $14.5 billion. Finally, a final agreement on the loan would end almost two years of negotiations and would draw a line under the uncertainty that has stopped foreign investors from returning to Egypt. The loan, more symbolic than financially helpful, would signal a new start for the nation.

SCENARIO 2: Loan delayed again, forecast for resuming negotiations

Given that increasing taxes on goods and services is a prerequisite for signing the final agreements on the IMF loan, it is a possibility that the government will attempt to further delay unpopular measures until after the parliamentary elections, which are due around February.

This could initially put pressure on the pound and budget deficit.

With tourism and foreign direct investment down, two of Egypt’s main sources of foreign currency, its ability to continue propping up the pound through foreign reserves will come under further pressure.

The central bank already appears to be letting the pound slip gradually. It not only hit a near eight-year low on December 26, but its value has been declining faster than usual in December. The pound has been stable and traded at around 6 pounds to the dollar for the first half of the year, only to start falling after Egypt signed a preliminary IMF loan agreement in mid-November.

Money to support the budget deficit from the EU and African Development Bank will also continue to be delayed so long as Egypt delays the IMF loan, and investor confidence will continue to be low.

This paves the way for Egypt to receive financial support from other actors, such as the Gulf states or the army — as it has done over the last two years — at least until parliamentary elections.

Though, with the politically charged atmosphere created by the constitution, the reinstatement of Parliament is no guarantee that the government will be any more likely to pass its planned austerity measures.

SCENARIO 3: Loan delayed with no forecast for resuming negotiations

Under this scenario, Egypt’s economy is most fragile. Domestic and foreign investors (individual and institutional – i.e. large companies) are likely to exit the debt markets and swap their pounds for dollars. The government will lose support from international donors who have waited for the IMF loan to pass, and much-need aid will pass by Egypt.

The country’s currency devaluation may be “disorderly”, according to this research note from Capital Economics:

“Failure to secure help from the IMF would make a disorderly devaluation more likely. In this scenario, the pound could overshoot, falling by perhaps 50% or more against the US$. The costs to the economy would be severe.

This is likely to lead to a spike in inflation, sharp hikes in interest rates, a potential banking crisis and rapid fall in asset prices.”

Higher inflation and a cheaper pound will be hardest for the poorest, who are already struggling in their daily lives. Food will become expensive and meagre salaries will buy less. A “Revolution of the Hungry” could lead to the revival of riots, political instability and public discontent with the Morsi administration.

Investor confidence will also be shaken in the short-term by the uncertainty created regarding Egypt’s economic plan and the government’s ability to get things done. A repeat of January 2011 could see companies scaling back or sitting out the crisis, and foreign direct investment could likely fizzle out.

The government will most likely try to press ahead with austerity measures, even without the prospect of signing an IMF loan agreement to get the budget under control, though pressure from political opposition forces will make it difficult to enact these reforms.

As Reuters reports, by “fast-tracking the constitution to a referendum that the opposition said was divisive, he [Morsi] may have squandered any chance of building a consensus on tax rises and spending cuts that are essential to rein in a crushing budget deficit.”

It is likely that with no agenda for resuming negotiations with the IMF, Egypt would have to go back to the drawing board and alter its macro-economic plan to accommodate the changing fiscal situation. Government officials say this could happen even when Egypt resumes negotiations with the IMF in January.

KEY CHALLENGES
Aside from the task of securing the IMF loan, Egypt faces a multitude of other significant challenges. Rebel Economy broke these down into a few major themes: the labour movement, tax reform, energy subsidies and the rule of law.

The Labour Movement

Egypt has experienced an increase in labour action since the outbreak of the revolution. Protests have forced factories and companies to shut down, which has shaken investor confidence and highlighted the need for more effective laws that govern employer-employee relations.

“There have been more strikes than ever before,” says Joel Benin, an academic who has written extensively on Egypt’s labour movement. There were 1,400 strikes and forms of collection action in 2011 alone, compared with no more than 800 in any previous decade, Benin estimated.

The main demand has been for the implementation of a minimum wage (ranging between 1,200 and 1,500 Egyptian pounds), better working conditions and recognition of Egypt’s newly formed independent unions.

A draft labour law, introduced by Ahmed el-Borai, the former labour minister, allowed unions to organise for the first time beyond the parameters of the government-controlled Egyptian Trade Union Federation. But there have been delays in fully enforcing the law, leaving workers in legal limbo, the Financial Times reported.

In 2013 the Shura Council, which now has legislative powers, or the lower house of Parliament, if re-elected as planned, could re-visit this.

Strikes have been increasingly effective. In three of the most recent strikes, at DP World’s Ain Sokhna port (a private company), Eastern Tobacco and Arab Polvara (both public), demands were eventually either fully or partially met.

The key challenge for employers, especially in the private sector, will be accepting that even if they spend a bit more on workers by implementing a minimum wage, the labour force in Egypt is still much cheaper than its regional competitors in Turkey, Morocco and Tunisia, and certainly Europe.

The government will need to introduce a labour law that satisfies workers’, unions’ and employers’ needs. It shouldn’t try to dominate the labour union movement and should avoid criminalising protests or responding with any heavy-handed measures, which would be counter-productive in the unrest it ensues.

Energy Subsidies

After years of debate, cutting one of Egypt’s biggest bills has become essential to balancing the nation’s financial books.

The government spends about 20% of its budget on keeping fuel prices down for the general public in a subsidy system that benefits the richest rather than the neediest. Now, Egypt is one of the worst offenders for energy subsidies in the world on par with Russia and China. And because its domestic consumption is rapidly growing, Egypt winds up using its share of production locally rather than earning much-needed revenue from exports. That means it buys expensive fuel from abroad and sells it at a discounted price domestically.

The country has shifted from being a net exporter to a net importer of oil over the past decade. This month Egypt’s petroleum ministry admitted it had also switched to a net importer of gas from a net exporter. The consequences of such an unsustainable practice are immense.

On a domestic level, fuel is so cheap that almost everyone uses their car to get around and congestion and pollution are normal. In addition, the government spends more on energy subsidies that health and education combined so the social impact is enormous. More worrying still is the rising (external) debt pile. The nation sells its fuel at a much cheaper price than it buys it so inevitably debts to international and domestic energy companies and banks grow.

Bankers that have interests in energy have told Rebel Economy repeatedly that energy subsidies are at the crux of Egypt’s wider problems. Reserves have been depleted not only to support the pound but to keep importing petroleum products to keep up with demand. The Central Bank released a statement this week saying it had spent $14 billion since the beginning of 2011 on imports of petroleum products and foodstuffs. Undoubtedly, this was to plug a shortage in the market.

So what can be done? What is clear is that everyone now regards energy subsidies as a drain on the budget and politicians acknowledge that reforms have to be made. But not much has come of the countless promises to enforce reforms including a coupon system that would better regulate subsidies and fuel price hikes that would instil a healthy aversion to buying gallons of fuel. So far, the Morsi administration has shown it is too weak to implement difficult reforms for fear of riots and a backlash. With two months before the parliamentary elections, it appears that Morsi must choose between temporary popularity by retaining the status quo of these plentiful fuel subsidies, or steer the nation out of its crisis and show a strong hand.

Tax Reform

The fact that Morsi couldn’t implement a hike in sales tax on alcohol in a country that is mostly dry shows what an uphill struggle his government faces in carrying out tax reform.

The government recently announced a package of tax hikes on goods and services, ranging from cigarettes and mobile phone calls to electricity bills and real estate. Within hours, the reforms were delayed amid calls for “societal dialogue” by members of the opposition and media. The delay was also seen as an attempt to win the popular vote at a politically sensitive time when Egyptians were set to vote on the constitution.

The move had more severe impacts, however. Egypt had to postpone the signing of the IMF agreement partly because tax reforms are a crucial part of the economic reform programme presented to the Fund. Without these tax hikes, it is unlikely the IMF would have agreed to disburse $4.8 billion.

Raising taxes is necessary to shore up finances and plug a budget deficit that reached 11% of GDP in the fiscal year that ended June 2012, and is projected to exceed 10% by June 2013.

But Morsi and his aides have yet to gain broad support on the matter with members of the opposition, a task that is necessary but hard to imagine given their poor track record in consensus building with non-Islamists.

Other tax measures, such as reforming the 20% income tax on wages whether rich or poor, as well as addressing corporation tax and broadening the tax base, are to be taken up by the next Parliament.

Rule of Law

There is an ongoing concern about respect for the rule of law in Egypt, which is critical to address before returning to stability. For example, the people blocking Tahrir Square believe the government is illegitimate so they illegally block traffic. Police, too, haven’t won back respect from the people, so they are unable to enforce the law sometimes.

As for the new constitution, though it spells out the new parameters for the rule of law, many people believe those parameters are incorrect. Max Rodenbeck spelled out the key flaws in this Economist report. The new constitution could give “Morsi’s party, the Muslim Brotherhood, a grip on power not unlike that enjoyed by Mubarak”, he writes.

The somewhat unpopular new constitution and a government still trying to win legitimacy from people means there is a rule of law crisis in Egypt. As Haitham Tabei writes in EgyptSource:

“Solutions must be found to the [rule of law] crisis, outside the current framework of religious institutions and inept security forces, and must depend instead on a state of citizenship, which guarantees the safety and protection of all its citizens regardless of religion.”

MAIN DRIVERS OF GROWTH

These challenges, though significant, are not impossible. Egypt’s geostrategic position on the crossroads of Europe and Africa, its large population and favourable tax conditions are all drivers of growth and mean the nation will continue to attract companies that want to tap the retail market, quickly. European banks, hit by the Eurozone crisis have had to offload assets in Egypt but these assets have caught the attention of Gulf banks, despite the political instability.

Société Générale has agreed to sell its majority stake in NSGB, its Egyptian subsidiary, to Qatar National Bank for $2 billion. BNP Paribas seeks bids for the sale of its Egyptian retail arm, which is expected to generate between $400 million and $500 million. Last year, Standard Chartered came close to acquiring the Egyptian assets of Greece’s Piraeus Bank.

Other merger and acquisition activity in the retail market is likely to continue in 2013. We are already seeing signs of this happening with Dubai’s Majid Al Futtaim in talks with Egypt’s Mansour Group, owned by billionaire Mohammed Mansour, to buy its supermarket business in a deal valued at $200 million to $300 million.

Enacting a law that would allow issuance of Islamic bonds, or sukuk, is also seen as one driver for investment growth next year, economists say. A sukuk law has been mooted for several years but only taken more seriously after the revolution when Islamist parties have lobbied harder for Islamic financing. Globally, $109 billion worth of sukuk were issued in the first nine months of 2012, up 69% from a year earlier, with the rise driven primarily by Malaysia and Gulf governments, according to research by Zawya. Egypt is yet to tap into this lucrative market.

Above all, economists say another driver of economic growth will be resolving investment disputes post-revolution. Egypt’s biggest companies, especially those in the property sector, have faced legal challenges because of Mubarak-era contracts. More recently contracts in some of the industrial sectors, including goldminer Centamin have been under the microscope. Some of these cases are rushed through with little valid evidence and are eventually overturned. A more accurate and thorough approach to investment cases will pave the way for a better corporate structure.

A BROADER VIEW OF ECONOMIC GROWTH

The great mistake of the Mubarak regime was not seeing its role as broader than just increasing growth. Their policies led to a revived economy, but the profits only stayed with a small elite and did not make an impact on the vast majority.

Economic policy is not just about making some numbers go up and others go down. That is why the definitions are so important. Gamal Mubarak’s cabinet of technocrats lacked the vision to redefine the aspirations of the government.

And that is one area where the Brotherhood’s Renaissance Project team are right. Khaled AlQazzaz, an advisor to Morsi on “integrated development”, explained during a conference earlier this year that the government was planning to change the metrics it uses to evaluate successes and failures. That means they are proposing a new way of looking at how the government improves the lives of Egyptians.

It will no longer just be about the GDP rate and number of teachers to pupils. It will be about whether the lives of Egyptians is improving or not, analyzed through a new set of performance indicators. This way all policies can be directed toward the right solution. The answer isn’t always in more teachers, but changing the curriculum. It’s not about number of hospitals, but about the health of Egyptians.

In New York City, the police department radically changed they way they approached crime by targeting the crime rate itself rather than police officers’ response time to a scene.

New York just reported its lowest number of murders for decades.

The government should go even further and establish an independent ministry to be in charge of the portfolio, so Egyptians know that the numbers aren’t being fudged to make the president look good.

It should also give the opposition movement something to think about. Are their policies just better technical tricks to balance the books or do they have a vision for Egypt that is broader than “neoliberalism without corruption”? This should be the basis of all political platforms: how will you grow the economy and how will you measure the impacts? The answer to those twin questions would give people a good idea of why they should or shouldn’t vote for them.

CONCLUSION

With little of its own money to spend, Egypt will be forced in 2013 to implement belt-tightening measures on stomachs that are already hungry.

The cries for “bread, freedom and social justice” continue to echo in protests that have not ceased since the 2011 uprising.

But austerity measures are difficult enough to implement in a country with political stability let alone one that is as polarised as Egypt. Strict reforms will undoubtedly stoke further unrest in the year ahead.

It does not help that the government consistently fails to consult the public about its plans in a transparent manner, or when it puts out decisions only to backtrack hours later. Transparency is crucial.

State institutions also contradict themselves in the information they put out, and state media is biased, all of which creates a climate of uncertainty and mistrust in government.

It is now or never for Morsi.

He has two paths to choose from: retaining the status quo or leading the country out of the crisis with a strong hand, clear communication and a promise to soften the blow for the most vulnerable. He has the power to implement reforms that will begin to change the lives of millions of people who are suffering from decades of neglect.

Can Morsi make the first, difficult steps of change not seen in the country for decades? Will he be strong and bold enough to lead the country out of its economic, social and political malaise? 2013 will be the test.

Egypt’s Central Bank yesterday published a strangley frank statement that sheds light on the country’s terrible spending habits and signals how the Morsi administration is losing its grip on the economy.

Just hours after the country’s president Mohammed Morsi made a speech to declare the economy was showing signs of improvement, the Central Bank said it plans to start foreign-exchange auctions in order to preserve foreign reserves after they plunged to “minimum and critical” levels.

The sales and purchases of US dollars will take place periodically and aim to “preserve foreign-currency reserves and ration their use,” according to an e-mailed statement from the Bank.

The new mechanism, which comes into effect today, will support the dollar interbank market.

The Egyptian pound is subject to a managed float but these auctions will mean the exchange rate is determined by the market rather than the Central Bank. It is a clear response to the depreciation of the pound, which fell to 6.1858 a dollar on Friday, near the lowest level in eight years.

A wave of dollarization, where the public have swapped their pounds for dollars, has exacerbated the pressure on the currency and the ability for the Central Bank to manage the pound’s fall. If you want to read more about Egypt’s currency situation, Rebel Economy put this guide together a few days ago.

But there’s more. The statement also revealed partly how Egypt’s reserves have been spent since the beginning of 2011:

$14 billion for the import of petroleum products and foodstuffs.
$8 billion for the payment of premiums and interest on foreign debt.
$13 billion to cover the exit of foreign investors from the local debt market.

The Central Bank said the total of $35 billion was financed from reserves plus other foreign exchange inflows.

It is the clearest sign yet of how Egypt’s costly energy subsidies have eaten up some of the country’s reserves to fund petroleum imports. Just this morning the ministry of finance said it has prepared $50 million to cover “urgent” petroleum import needs.

Debt service payments in foreign debt is also significant considering the country boasts about low external debt.

Even so, the renewed transparency from the finance ministry, central bank and the presidency is a positive step toward communicating to the public the situation on the ground, something that has been missing for several months. With it, Egyptian officials have explained that the country is not in danger of going bankrupt as several media reports have signalled. This morning Mumtaz el Saeed, Egypt’s finance minister said it was all an “illusion” and a “myth”.

It is unlikely that Egypt will go bankrupt simply because it is too big to fail but also because of the large amount of domestic debt Egypt has which can be rolled over easily unlike foreign debt which carries expensive penalties if not paid on time.

However, the country could get stuck in a perpetual cycle whereby debt is always rolled-over with no fear of default, supported by a cushion from foreign donors such as Qatar, Saudi Arabia and Turkey.

With help from Bradley Hope, The National newspaper’s Cairo bureau chief.

Egyptian President Mohammed Morsi has proved to be a recalcitrant negotiator with the opposition movement in Egypt over the past month, raising questions about the sudden move toward magnanimity in his speech Wednesday night where he appealed for calm and national dialogue.

Politically, he may be trying to seal the issue of the constitution once and for all through some compromises. (It passed with slim approval by 63.8 per cent of voters and only about a third of registered voters took part in the referendum).

But a bigger concern for the president and his Islamist supporters is the economy. The reputation of the Muslim Brotherhood’s new political power is on the line. The last thing the group wants is to be the stewards of a full-blown economic crisis, something that could tarnish their reputation and electoral viability in years to come. If Egypt remains unstable, foreign donors will be wary of lending, investors will wait on the sidelines and tourists will stay away.

In the short-term, the Egyptian pound has moved to centre-stage. It hit a near eight-year low on December 26, dropping to LE6.175 per dollar. It has slowly declined over the past two years from about LE5.7.

Monetary policy and impacts of a currency devaluation – which many are predicting as imminent – can be bewildering, so Rebel Economy has prepared this explainer.

A deliberate downward adjustment to a country’s official exchange rate relative to other currencies. In a fixed exchange rate regime, only a decision by a country’s government (i.e central bank) can alter the official value of the currency. Contrast to “revaluation”.

A devaluation is a policy decision by the government, as opposed to a depreciation, which happens when a free-floating currency reacts to market forces.

Although Egypt officially floated the pound in 2003, it has a policy of managing the pound in what is known as a “managed float rate regime”. That means that the currency rate fluctuates, but is ultimately managed by the Central Bank of Egypt through capital controls and trading of foreign currencies.

That means the pound’s nominal exchange rate has remained almost unchanged since 2004.

So, what’s the problem?

The Central Bank cannot carry on using its foreign reserves for much longer.

The Central Bank’s policy has led to a rapid decrease in foreign reserves to just $15.04 billion from $36 billion in late 2010, a dangerously low level that is just enough to cover three months worth of imports.

The two most important sources of foreign currency (which would normally keep foreign reserves replenished), tourism and foreign direct investment, have dried up because of Egypt’s economic crisis.

Tourism revenues have declined by about a third and foreign direct investment was just $2.5 billion in the first half of 2012 versus $4.1 billion in the first half of 2010, according to the UN.

GDP growth has slowed to 2.2%, from annual rates of 5.5% before the revolution, and unemployment has increased to 12.6%.

The Central Bank has not been able to hold off a depreciation and the pressure on the pound from continued political instability has reached crisis point. Egyptians are swapping their pounds for dollars in a process better known as “dollarization”, exacerbating the depreciation of the pound, and meanwhile the Central Bank is struggling to fight against market forces that are pushing the currency down.

Why does Egypt want to protect its currency?

Protecting the currency prevents a scenario where real wages decline. (The actual wage for a professor, for example, would stay the same but he or she would be able to buy less with the salary if the currency depreciated).

A depreciated currency would also lead to a rise in exports (because they would be cheaper for foreign buyers) but a decline in imports (because they would become more expensive for domestic buyers). Finally, inflation would rise more quickly with a cheaper pound. In general, it would lead to a more difficult period for Egyptians, especially for those who are already suffering the most.

Analysts have been predicting for more than a year that Egypt would be forced to devalue the currency when it no longer had enough reserves to prop up the pound. The question, they have said, is only when it would happen.

A forced devaluation can also happen merely due to speculation on the market and the perception that a devaluation is coming. If everyone panics and tries to exchange their pounds for dollars, which is already happening in Egypt to some extent, then the level of foreign reserves will decline even more rapidly.

“If reserves are depleted, the government would need to start borrowing to buy commodities, pushing prices higher and demand lower, and risking a currency explosion similar to what happened in 2003. That could lead to stagflation, a period of high inflation and slow growth.”

The International Monetary Fund’s $4.8 billion loan package to Egypt would act as an important stimulus for providing more foreign currency to protect the pound, but it has now been delayed by President Morsi.By many accounts, he believed the country was not yet ready for the austerity measures (higher taxes and lower subsidies) that are part of the economic programme created by Egypt to appease the IMF.

“The key question is whether the necessary devaluation is orderly or disorderly. Failure to secure help from the IMF would make a disorderly devaluation more likely. In this scenario, the pound could overshoot, falling by perhaps 50% or more against the US$. The costs to the economy would be severe.

This is likely to lead to a spike in inflation, sharp hikes in interest rates, a potential banking crisis and rapid fall in asset prices.”

The IMF is not the only potential saviour for Egypt’s economy. It is supported by the US and Qatar, among others, who could also step in to support the government in the event of a dire crisis.

“A key effect of devaluation is that it makes the domestic currency cheaper relative to other currencies. There are two implications of a devaluation.

First, devaluation makes the country’s exports relatively less expensive for foreigners. Second, the devaluation makes foreign products relatively more expensive for domestic consumers, thus discouraging imports. This may help to increase the country’s exports and decrease imports, and may therefore help to reduce the current account deficit.

A significant danger is that by increasing the price of imports and stimulating greater demand for domestic products, devaluation can aggravate inflation. If this happens, the government may have to raise interest rates to control inflation, but at the cost of slower economic growth.

Another risk of devaluation is psychological. To the extent that devaluation is viewed as a sign of economic weakness, the creditworthiness of the nation may be jeopardized. Thus, devaluation may dampen investor confidence in the country’s economy and hurt the country’s ability to secure foreign investment.

Another possible consequence is a round of successive devaluations. For instance, trading partners may become concerned that a devaluation might negatively affect their own export industries. Neighboring countries might devalue their own currencies to offset the effects of their trading partner’s devaluation.”

The worst consequence for Egypt is the prospect of rising inflation. Egypt is a food importing country, so the cost of feeding a family would inevitably increase. This is what political figures mean when they talk of the coming “Revolution of the Hungry”. Many families in poor areas of Egypt are already hard-pressed to afford the unavoidable private education and healthcare costs as well as basic necessities.

A family in Saft el Laban, a poor neighbourhood in Giza, explains in detail how quickly a month’s wages disappear. Said Abdel Hameid, who is married with three children, earns 1,500 pounds a month through two jobs, but most of it is gone within a few days:

“About 500 pounds a month goes paying of his debt for household goods: two fans, an old television and a battered tabletop. Another 25 pounds is paid for a natural gas connection – a rarity for many – that will be amortised over seven years. That does not include the cost of gas used, which averages another 10 pounds a month.

Then comes education costs. The public school system is so dysfunctional that nearly every family in Egypt, poor and rich, pays for private lessons in a bid to improve their children’s’ chances at getting a job. The school of Mr Abdel Hameid’s daughter, Sama, 7, requires 100 pounds a month for after-school lessons. Another 150 pounds is paid for other private lessons from teachers.

Rent for their flat, which consists of two small bedrooms and a living room, is 250 pounds.

That leaves the Abdel Hameid family with about 465 pounds to get through the month. It is barely enough to put basic food on the table. At 5 pounds a kilo, tomatoes are a luxury. To keep up with hungry mouths, the only option is to buy macaroni and rice in bulk. Foul, a boiled bean dish, is a mainstay of their cuisine.”

His income does not include the cost of healthcare, which is supposed to be free in Egypt but the system is so dysfunctional that nearly everyone shells out for private treatment if someone is really sick. The Abdel Hameid family can only pay for medicine if the whole family bands together to raise enough money.

Looking Ahead

No matter what happens in Egypt – an abrupt devaluation, a government-managed devaluation or a continuation of the same Central Bank policy of backstopping the pound – the impacts will be most heavily felt in Egypt’s most vulnerable population. The government has done a poor job of explaining their economic plan for the future (if they have one) and without this, there will be no buy-in from the population, especially if they are afraid of an even worse form of poverty than they already endure. A devaluation is by no means a strategy by itself.

The government must prove that it will take other measures to soften any impacts and get Egypt’s economy growing again. “Renaissance”, which Morsi called for in his speech on Wednesday, is only a word.

What happens when a president of a newly democratic country decides to act more like a tyrannical than post-revolutionary leader?

It’s clear that it leads to a severe crisis of confidence from the public; the same people that elected this president (albeit, by a narrow margin) to his place less than six months ago.

President Morsi’s decision to issue a decree that granted him far-reaching powers effectively began an avalanche of economic mayhem not seen since the revolution broke out in early 2011.

The swift backflip on this decision did not make any difference, because Morsi had decided to go ahead with a referendum on the constitution, despite calls to delay it. That has now been passed but there was no landslide victory and Morsi must accommodate a slim mandate that will make it difficult to enforce any economic reform measures.

Above all, the political turmoil that has ensued over the last month has prompted fears that the government is not in control of its finances and the economy.

As a result, fears have grown over the pressure on the pound currency and there has been a rush by Egyptians to withdraw their savings from banks. Initially, the Central Bank sent out a cryptic message of reassurance that it would protect the public’s bank deposits.

Al Arabiya flashed a headline two days ago:

Then the bank made its move in an attempt to nip in the bud a dangerous path of dollarization, which would put increasing pressure on the pound and the nation’s dwindling international reserves.

The anxiety over the economy was visible at currency exchanges in the upscale Cairo neighborhood of Zamalek, which ran out of dollars by midday and offered only euros — a rare occurrence. Some banks, too, said they had run out of cash dollars, forcing people to seek foreign currency from exchanges around the city.

There were also reports from the local media that an Emirati aircraft delivered cargo loads of cash amounting to $30 million to Egypt to help plug the shortage of dollars. In another blow, the ratings agency Standard & Poor’s cut the government’s credit rating citing the political turbulence and warning that another cut could come if political problems persist.

The panic prompted a full-scale media management.

The Central Bank of Egypt issued a statement on Monday calling on banks not to listen to rumours circulating about the fiscal health of the nation.

Dr. Mohamed Gouda refuted rumors being persistently reported in print and broadcast media about the poor economic situation in Egypt, pointing out that there is a difference between explaining the economic situation and spreading panic.

“Economic problems can be solved. There is nothing impossible about them. But security and political stability are essential to help the economy and implement the reform plan.”

Well, those aren’t rumours. Egypt is in a dire economic situation and denying this will only prolong the pain.

The president made a terrible decision just over a month ago, and now the nation is paying for it. It’s time we saw Morsi making some sacrifices and leading a nation rather than his Brotherhood colleagues.

No where in the Arab world are conditions as frightening as in Syria, where a conflict that broke out in March 2011 has left tens of thousands of people dead.

And there are few other countries in the Arab world struggling with the same economic pressures as Syria, which has been hit hard by US and EU sanctions.

Now, intense pressure is on the country’s domestic currency as rebels have take their battle closer to the centre of the capital and international powers have started talking about military intervention in the escalating civil war.

The currency had hit a record low of 105 to the dollar earlier this year before recovering slightly. Until about November, the central bank had mostly managed to keep the pound’s depreciation at a manageable rate, with its black market dollar value staying below 75 for most of the year.

Economists have said the country has averted a sharp currency decline because of the central bank’s intervention, flows of cash from Assad’s friends and enemies abroad, and the prospect of a wave of foreign investment if Assad were to fall.

But an unfortunate combination of higher demand for foreign currency, international sanctions and the choking of supply routes because of the conflict is driving prices of basic goods ever higher.

“Life in Syria is very, very expensive now,” said one Damascene who had spent 650 Syrian pounds ($9) the previous day on a cooked chicken that would have cost about 350 a few months ago, the FT reported earlier this month. “The value of the dollar is increasing very, very fast,” she said.

A Reuters report today illustrates the contrasting pressures on the currency:

In Syria’s eastern town of Deir al-Zor, a rebel commander flush with cash was swapping his dollars for Syrian pounds to pay fighters battling President Bashar al-Assad’s forces.

Money changers said that influx of foreign currency earlier this month helped push the pound’s black market rate in the impoverished town up by at least 10 percent.

Hundreds of kilometres away in Damascus, panicked Syrians bracing for more violence sold pounds for dollars, driving the pound, which has lost half its value since the anti-Assad uprising erupted in March last year, the other way.

The influx of foreign currency is coming from Assad’s friends and foes alike.

What is clear now is that the central bank is running out of reserves to fight currency pressures.

Before the unrest broke out, Syria had about $17 billion in foreign currency reserves. Economists estimate the central bank now has about $6-8 billion in reserves, dwindling about $500 million a month for salaries and supplies to keep the government running.

At some point, the regime’s ability to contain two years of economic instability will waver and economists say the tipping point is coming.

Do not be surprised if Egypt’s central bank governor Farouk El Okdah leaves his post in the early part of next year. Even though he yesterday vehemently denied that he planned to resign, his retirement has been on the cards for months (not just rumours but who is likely to replace him).

That is poor judgement considering his move will have been planned for months, and an announcement of resignation or retirement is not likely to be followed by a swift departure. It is also likely that El Okdah does not want his departure to appear political amid the tumultuous situation in Egypt. The sensitivity of the situation means the leak to the local press must be managed with impassioned denials.

The most critical development within the Central Bank will be the impending amendments to the law governing its activity, which experts are concerned will infringe on its independence.

State-run Al-Ahram reported early in December that President Mohamed Morsy plans to issue a decree to amend the statutes that govern the bank and its officials, giving himself the authority to appoint members of its governing board.

The modifications reduce the number of board members and give the president the right to nominate the next CBE governor without the usual recommendations from the prime minister.

The amendments may also affect the positions of the some of the bank’s board members (all well known in the Egyptian business community), Moustafa points out:

Due to their current posts, some of the bank’s board members that may be affected by the changes include both Amer and Barakat, as well as chairman of Banque Misr Abdel Salam al-Anwar, former chairman of HSBC Egypt Mona Zulfacar [the chair of EFG Hermes], legal expert and board member of EFG-Hermes Alaa Saba [former CEO at Beltone] and economic expert Ziad Bahaa Eddin, who is also the former head of the Egyptian Financial Supervisory Authority.

The central bank has been lauded for its work in the last decade including a smooth flotation of the currency and the elimination of a black market. But these amendments, if eventually passed, will likely pit the new governor against the president in a battle for independence.

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For those expecting President Morsi to enact his long-awaited reform plans, here is evidence that it is now or never:

Egypt’s budget deficit increased to LE80.7 billion ($13 billion) during the first five months of the current fiscal year 2012/13, which starts in July, the Ministry of Finance reported on Sunday in a bulletin, Ahram Online reported.

The same period of last year witnessed a budget deficit of LE58.4 billion ($9.5 billion).

That means, since Mohammed Morsi has been in power, the budget deficit has widened by almost 37%.

Supporters say Morsi is planning to implement nationwide subsidy reforms and tax hikes after the parliamentary elections (which should start in two months from the referendum passing, but nothing has been formally announced). But wasn’t Morsi’s presidential campaign resting on the Renaissance Project and all the economic boosts that he claimed would come with it after he was elected? What’s happened to that? We have not heard anything related to the project for months and months.

Morsi, in the context of his dogged determination to go ahead with the constitution, already has a slim mandate to enforce tough austerity measures. But the more he waits, the less people he will please. It’s now or never.

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The one silver lining for Egypt, as Rebel Economy has pointed out before, is its 83 million consumer market. That has brought the Gulf banks to Egypt to snap up banking assets ripe for picking, despite the political risk.

Dubai’s Majid Al Futtaim (MAF), is in talks with Egypt’s Mansour Group, owned by billionaire Mohammed Mansour, to buy its supermarket business in a deal valued at $200 million to $300 million, three sources aware of the discussions said.

Mansour Group, also the largest distributor of General Motors cars in Egypt, is aiming to sell supermarket chain Metro and discount grocery store Kheir Zaman, the sources said, speaking on condition of anonymity as the matter is not public.

These “Egypt bulls” see low valuations after the revolution and are willing to take the risk of the political situation. It’s always been said that retail is a defensive market because the sector is able to weather any crisis. After all, no matter what people will always shop.

The sky is not falling, yet. While Egypt’s Central Bank Governor’s resignation now appears final, it does not mean that the pound is imminently going to undergo a devaluation. But it does raise questions about how monetary policy may change in the coming months, especially as Egypt’s much-needed economic reforms are being delayed by the political crisis caused by President Mohammed Morsi’s actions and a controversial constitution that now appears to be approved.

Zawya Dow Jones reports this morning:

President Mohammed Morsi has appointed Hisham Ramez the new governor of the Central Bank of Egypt, a senior official told Zawya.

“A presidential decree to appoint Hisham Ramez is expected to be issued as soon as the referendum on the constitution results are concluded,” the official said on condition of anonymity as he is not authorized to speak to media.

“According to the new constitution, a senior government official cannot take more than two terms in office. Dr. Farouk El Okdah, the current governor of the central bank has occupied this post for three consecutive terms,” the person said.

If accurate, months of speculation that Farouk El Okdah would resign at the end of the year will be over. El Okdah, a former chairman of the state-run National Bank of Egypt, came into office in December 2003. He was reappointed to a third four-year term in November 2011.

Hisham Ramez, a former deputy governor himself, will rejoin the Central Bank from Commercial International Bank, where he was appointed vice-chairman and managing director in November 2011. The Zawya story reports:

“Ramez has met with president Morsi and has accepted the appointment, especially since he specializes in management of cash reserves, and has succeeded in stabilizing the foreign exchange market in Egypt over the past few months,” the official told Zawya on Sunday.

Foreign reserves have more than halved in the two years following the revolution and stand at a meagre $15 billion. The central bank has kept a tight control over the currency and attempted to stabilise the Egyptian pound with reserves.

But economists say the depreciation of the Egyptian pound to about 6.14 pounds to the U.S. dollar shows a deliberate effort by the central bank to ease pressure on the pound and guard international reserves. The pound stood at 5.7 to the dollar two years ago. Analysts say it could reach 7 pounds to the dollar by the beginning of next year.

Though the position of central bank governor is critical in any country, for Egypt the position is especially sensitive because monetary policy decisions have the potential to have enormous ramifications on the stability of the country. Having said that, El Okdah’s exit is not as dramatic as some may perceive. He does not hold his steady finger over the economic stability of the nation.

After all, his decisions are made in the context of government policy and very rarely does he make the final call. A presidential decree that gave Morsi more power over who is appointed on the CBE board is an indication of how independent the central bank will be in months to come.

Hisham Ramez may be knowledgeable in all things FX, but he will face a hard battle between succumbing to the requirements of Morsi and government and the needs of the country.

Though a culture of corruption had been allowed to fester under Mubarak, increasingly there has been a criticism of the speed at which post-revolution trials took place. Lawyers say that though there is a case against some of these former politicians, the “witch-hunt” that has ensued against some people has led rushed cases where evidence is flimsy. That’s not to say all these people are innocent, but more an indication of how the need to satisfy the public’s demands for justice has led some public prosecutors to become compromised and rush through cases without care of presenting valid evidence.

Cases involving large companies such as Talaat Moustafa, the property company, have also seen cases rushed through then overturned.

If Egypt is to have a reborn culture of transparency and communication, these cases must be addressed in the way they deserve; painstaking analysis and extraction of foolproof evidence. These cases are often complex and convoluted and more often than not, money is hidden in various offshore vehicles that are hard to track. A quickie court case is not going to address and eradicate the crime in the way the public would want.

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South Korea plans to invest US$583 million in Egypt, South Korean ambassador Young-so Kim said on Tuesday, according to Egypt Independent. The ambassador said that the trade exchange volume between the two countries has reached $2.4 billion. In October, Samsung, the South Korean electronics giant, said it would build a LE1.7 billion plant in Beni Suef (it’s first plant in the Middle East and North Africa) in a move that will create 1,400 new jobs. Similarly to the Chinese, countries like South Korea benefit enormously from Egypt’s cheap land and relatively cheap labour.

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Egypt plans to raise LE10.5 billion ($1.7 billion) over the next week from Treasury bill sales as it prepares for the second round of a referendum on a new constitution, Bloomberg reported. Egypt continues to offer government securities to predominantly domestic banks to plug its budget deficit. What is more worrying however, is that interest payments that the government must pay on these bills. Remember last year’s yields on bills that reached almost 16%? Well those yields are now coming to maturity, and the interest payments on those make up about 15%-16% of the budget, economists have told me. What’s more, the rate at which the government is having to pay those interest payments off, is actually exceeding the rate at which the government pays for energy subsidies. That is a huge additional burden on the budget. Luckily for the government, yields have now eased off so the securities Egypt sells today won’t cost as much when they mature.

Egypt spent around $9.7 billion to import oil products in the year to end-June 2012, about $2.8 billion more than in the previous year, data from the Central Bank of Egypt shows. However, David Butter, a long-time Middle East journalist then pointed out that the Central Bank appeared to have significantly modified their oil trade figures:

Whether or not the Central Bank corrected their figures or fudged them to appear more favourable is not clear.

Unemployment figures from Saudi Arabia reveal two long-running problems for the oil-rich state has: a large number of unemployed women (who are gradually being accepted into the workforce) and an unemployed immigrant workforce. As a result, jobless numbers reached almost 2 million, according to Ahram Online’s report. Unemployment among women is exceptionally high in Saudi Arabia surpassing that of men by almost 30%, to reach a total of 1.7 million. Almost half of those women hold university degrees, the Saudi labour ministry indicates. Meanwhile, recommendations are being made to employ these people in the private sector, rather than the public sector, where saturation is already very high.

It is the latest sign of how Citadel is quietly moving toward filling a gap in the energy market which is likely to be left after a reform of the country’s energy subsidies.

Shoeb is the former head of the state-run gas company, Egyptian Natural Gas Holding Company (EGAS), and prior to that was the vice Chairman for operations at the state oil company, Egyptian General Petroleum Corporation (EGPC).

The problems attached to both companies do not reflect kindly on Shoeb; EGAS was at the centre of a politically controversial cancellation of a gas contract to Israel, while EGPC is facing a potential bail-out from Egypt’s banks because of a mounting debt pile to foreign oil companies and banks for energy exploration.

However, the former EGAS head brings experience and knowledge of the nation’s state energy industry (and its specific challenges) that would be hard to find elsewhere. Importantly, he has deep connections in the sector that will come in very useful for Citadel at a time when its most high-profile investments are in the energy market. These include:

– a $3.7 billion financing package for the Egyptian Refining Company project

– A joint venture with Qatari investors to import liquefied natural gas into Egypt from mid-2013

Its portfolio company National Petroleum Company Egypt Ltd. sold National Petroleum Company Shukheir Marine Ltd. to Sea Dragon Holding Ltd., a subsidiary of Canada’s Sea Dragon Energy.

“This transaction is the first of a number that will see us exit non-core portfolio and platform companies as part of our transformation over the coming three years into an investment company,” said Citadel Chairman Ahmed Heikal.

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A spat between EGPC and Centamin’s Sukari goldmine appears to be almost resolved after customs authorities on Sunday allowed an export shipment of 1,600 kilograms of gold to the Netherlands, Egypt Independent reports.

Shipment had been halted by Egyptian customs because the petroleum and finance ministries had said Centamin owed the authorities back-dated payments for fuel. Centamin denied this and said its payments were up to date.

Josef El Raghy, chairman of Centamin, has faced labour strikes and fuel shortages that have forced the firm to halt production twice this year.

It’s a stark reminder of both a highly bureaucratic state where the lack of a signature can halt valuable exports that could shut a company down, and how fuel shortages at EGPC have the potential to trickle into important industries across Egypt.

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One clear characteristic of the Morsi administration’s economic programme is its resemblance to Mubarak-era projects. The following is no exception. Egypt Independent reports:

Prime Minister Hesham Qandil has tasked the agriculture, irrigation, electricity and investment ministries to begin implementing a project the government hopes will reclaim and cultivate a million new acres of farmable land over four years

The mega-project aims to build up wheat production by 25%, corn production by 15%, and oil production from 10% to 40%. Sounds ambitious. For many investors, this announcement may appear flippant, especially given the agriculture minister’s throwaway remarks that “the project aims to reach self-sufficient production levels”. By when? And how? Critical questions such as this are almost never answered.

National Bank of Egypt, the country’s biggest state bank, will finance the project. NBE has increasingly become the “Bail-Out” bank of Egypt, supporting EGPC and stepping in when projects get pricey.

The BOT scheme has been used by Egypt regularly in the past to help get past the financing hurdle for big infrastructure projects. It means a private entity receives a concession from the private or public sector to finance, design, construct, and operate a facility stated in the concession contract. The government benefits from the final product – in this case, wind energy.

Under the BOT scheme:

Land would be sold to private companies for a small fee under the BOT scheme, granting them use anywhere between 20 to 25 years. Products used by private companies in the production of renewable energy sources would not be subject to taxes or customs duties.

Land is being offered in the Gulf of Suez area (1,222 sq km), West Nile (4,200 sq km) and East Nile (2,200 sq km) regions.

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Energy giant BP is seeking to change the terms of its contract with the Iraqi government for the Rumaila oilfield in a reflection of the challenges facing western oil companies as they try to ramp up oil production in a country still dogged by poor infrastructure, red tape and export bottlenecks, the Financial Times reports.

The company is asking to scale back production, underscoring “how a lack of infrastructure and bureaucratic problems are constraining the growth of Iraq’s oil industry, forcing companies operating there to re-evaluate their production plans”.

Though voting will continue in other parts of Egypt next week, Saturday’s vote is important because it represents Cairo and Alexandria, the nation’s two biggest cities. The areas represent the stronghold of the opposition to the constitution.

Conflicting results from the Muslim Brotherhood and the main opposition umbrella group, the National Salvation Front, showed both claimed victory. However in past votes, the Brotherhood’s preliminary numbers have closely matched final results, will be announced after the December 22 second round vote.

Yesterday’s ballots show the referendum is likely to be passed and the challenge now rests with the country’s president Mohammed Morsi, who has already undermined confidence in the democratic transition and economy. He campaigned with billboards that read: “With the Constitution, the wheel will turn”. But reality paints a different picture.

The most punishing challenges are ahead for Morsi:

Morsi’s mandate will be slim and he will find himself in an untenable position at times where tough austerity measures will be harder to enforce without serious backlash. His credibility is already wavering with a large part of Egypt because of his decision to hold a referendum without the support of the opposition.

Morsi is weaker than he has ever been. Every day that passes, the president makes a move that is met with resounding protest and opposition. His back-flip over tax reforms and the International Monetary Fund loan have only offered proof to his critics that he is not presidential material. This is not necessarily because of the nature of the reforms but how he chooses to deliver the message, that is, almost always in a void with little communication and explanation to the public.

In the streets, chants of “Get out Khairat al Shater” can be heard. It is reminiscent of the protests last year against Mubarak’s gang of corrupt businessmen including Ahmed Ezz. There are mounting concerns over Morsi’s clique, especially Al Shater, a Brotherhood businessman who appears to have a great influence over the country, but who remains a mystery to most. Transparency is not Al Shater’s strong point.

Finally, the constitution itself has raised questions over how the Egyptian economy will run, including improved labour rights and whether these are addressed in the constitution and the dominant interpretation of Islamic Sharia and how this could influence banking and finance. Yet more important than the constitution’s many flaws “is the context in which it is being proposed,” this Economist article argues:

When Mr Morsi captured the presidency in June by a slim margin, he signalled magnanimity by formally quitting the Muslim Brotherhood and appointing a largely technocratic government. Egyptians cheered in August when he removed the domineering generals who had shakily guided the post-revolutionary transition.

But Mr Morsi has proven equally erratic and domineering. The Brotherhood, meanwhile, has infiltrated state institutions. It has tried to shape the message of the state-owned press, arranged for its members to distribute government-subsidised goods, and quietly scaled back family-planning programmes.